10-Q 1 a10-12688_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

COMMISSION FILE NUMBER 001-11911

 

STEINWAY MUSICAL INSTRUMENTS, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

35-1910745

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

800 South Street, Suite 305

 

 

Waltham, Massachusetts

 

02453

(Address of Principal Executive Offices)

 

(Zip Code)

 

 

Registrant’s telephone number including area code:    (781) 894-9770

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements during the past 90 days.    Yes x    No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes o    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o     No x

 

Number of shares of Common Stock issued and outstanding as of August 4, 2010:

 

 

Class A

 

477,952

 

Ordinary

 

11,598,337

 

Total

 

12,076,289

 

 

 



Table of Contents

 

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

 

PART I

FINANCIAL STATEMENTS

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements:

 

 

 

 

 

Condensed Consolidated Statements of Operations Three and six months ended June 30, 2010 and 2009

3

 

 

 

 

Condensed Consolidated Balance Sheets June 30, 2010 and December 31, 2009

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2010 and 2009

5

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity Six months ended June 30, 2010

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 6.

Exhibits

29

 

 

 

 

Signatures

30

 

2



Table of Contents

 

PART I                                                       FINANCIAL STATEMENTS

 

ITEM 1                                                        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

(In Thousands Except Share and Per Share Amounts)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net sales

 

$

78,248

 

$

72,113

 

$

146,791

 

$

142,104

 

Cost of sales

 

56,085

 

53,215

 

103,304

 

104,597

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

22,163

 

18,898

 

43,487

 

37,507

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

10,032

 

9,860

 

20,169

 

20,480

 

General and administrative

 

6,598

 

7,248

 

13,717

 

14,702

 

Other operating expenses

 

392

 

283

 

737

 

869

 

Total operating expenses

 

17,022

 

17,391

 

34,623

 

36,051

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

5,141

 

1,507

 

8,864

 

1,456

 

 

 

 

 

 

 

 

 

 

 

Other expense (income), net

 

658

 

(253

)

(809

)

(811

)

Net gain on extinguishment of debt

 

(104

)

 

(104

)

(3,434

)

Interest income

 

(287

)

(420

)

(744

)

(982

)

Interest expense

 

2,782

 

2,936

 

5,598

 

6,020

 

Total non-operating expenses

 

3,049

 

2,263

 

3,941

 

793

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

2,092

 

(756

)

4,923

 

663

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit)

 

912

 

(136

)

1,943

 

278

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,180

 

$

(620

)

$

2,980

 

$

385

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.10

 

$

(0.07

)

$

0.27

 

$

0.05

 

Diluted

 

$

0.10

 

$

(0.07

)

$

0.26

 

$

0.05

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

Basic

 

12,019,468

 

8,533,259

 

11,226,649

 

8,533,259

 

Diluted

 

12,098,725

 

8,533,259

 

11,291,021

 

8,537,619

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

 

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(In Thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash

 

$

92,063

 

$

65,873

 

Accounts, notes, and other receivables, net of allowances of
$13,916 and $13,643 in 2010 and 2009, respectively

 

46,852

 

45,073

 

Inventories

 

151,868

 

158,030

 

Prepaid expenses and other current assets

 

13,698

 

13,499

 

Deferred tax assets

 

12,272

 

11,431

 

Total current assets

 

$

316,753

 

$

293,906

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation of
$106,416 and $105,744 in 2010 and 2009, respectively

 

84,933

 

89,538

 

Trademarks

 

14,614

 

15,284

 

Goodwill

 

21,929

 

24,063

 

Other intangibles, net

 

3,520

 

4,183

 

Other assets

 

12,343

 

12,663

 

Long-term deferred tax assets

 

11,135

 

10,153

 

 

 

 

 

 

 

Total assets

 

$

465,227

 

$

449,790

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Debt

 

$

1,131

 

$

537

 

Accounts payable

 

9,961

 

9,764

 

Other current liabilities

 

37,616

 

36,395

 

Total current liabilities

 

48,708

 

46,696

 

 

 

 

 

 

 

Long-term debt

 

151,976

 

157,703

 

Deferred tax liabilities

 

7,087

 

7,124

 

Pension and other postretirement benefit liabilities

 

33,236

 

35,766

 

Other non-current liabilities

 

5,505

 

6,005

 

Total liabilities

 

246,512

 

253,294

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock

 

14

 

12

 

Additional paid-in capital

 

153,135

 

125,192

 

Retained earnings

 

129,289

 

126,415

 

Accumulated other comprehensive loss

 

(17,004

)

(7,851

)

Treasury stock, at cost

 

(46,719

)

(47,272

)

Total stockholders’ equity

 

218,715

 

196,496

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

465,227

 

$

449,790

 

 

See notes to condensed consolidated financial statements.

 

4



Table of Contents

 

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(In Thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

2,980

 

$

385

 

Adjustments to reconcile net income to cash flows from operating activities:

 

 

 

 

 

Depreciation and amortization

 

5,050

 

5,362

 

Amortization of bond discount

 

74

 

77

 

Net gain on extinguishment of debt

 

(104

)

(3,434

)

Stock based compensation expense

 

741

 

562

 

Excess tax benefits from stock-based awards

 

64

 

 

Tax benefit from stock option exercises

 

4

 

 

Deferred tax benefit

 

(1,207

)

(679

)

Other

 

335

 

703

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts, notes and other receivables

 

(2,655

)

3,744

 

Inventories

 

306

 

(7,357

)

Prepaid expenses and other assets

 

(552

)

1,997

 

Accounts payable

 

472

 

(3,395

)

Other liabilities

 

2,603

 

(3,946

)

Cash flows from operating activities:

 

8,111

 

(5,981

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(1,150

)

(2,212

)

Proceeds from disposals of property, plant and equipment

 

7

 

24

 

Other

 

78

 

 

Acquisition of businesses, net of cash acquired

 

 

(820

)

Cash flows from investing activities

 

(1,065

)

(3,008

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Borrowings under lines of credit

 

799

 

126,693

 

Repayments under lines of credit

 

(264

)

(109,006

)

Repayments of long-term debt, net of discount

 

(5,633

)

(7,280

)

Proceeds from issuance of common stock

 

27,647

 

 

Excess tax benefits from stock-based awards

 

(64

)

 

Cash flows from financing activities

 

22,485

 

10,407

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash

 

(3,341

)

(98

)

 

 

 

 

 

 

Change in cash

 

26,190

 

1,320

 

Cash, beginning of period

 

65,873

 

44,380

 

Cash, end of period

 

$

92,063

 

$

45,700

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

6,144

 

$

7,208

 

Income taxes paid

 

$

5,080

 

$

2,882

 

 

See notes to condensed consolidated financial statements.

 

5



Table of Contents

 

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Unaudited

(In Thousands Except Share Data)

 

 

 

Common
Stock

 

Additional
Paid-In
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Treasury
Stock

 

Total
Stockholders’
Equity

 

Balance, January 1, 2010

 

$

12

 

$

125,192

 

$

126,415

 

$

(7,851

)

$

(47,272

)

$

196,496

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

2,980

 

 

 

 

 

2,980

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

(9,213

)

 

 

(9,213

)

Changes in pension and other postretirement benefits, net

 

 

 

 

 

 

 

60

 

 

 

60

 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(6,173

)

Exercise of 23,700 options for shares of common stock

 

 

 

 

(106

)

 

 

553

 

447

 

Tax benefit of options exercised

 

 

 

4

 

 

 

 

 

 

 

4

 

Stock-based compensation

 

 

 

741

 

 

 

 

 

 

 

741

 

Issuance of 1,700,000 shares of common stock

 

2

 

27,198

 

 

 

 

 

 

 

27,200

 

Balance, June 30, 2010

 

$

14

 

$

153,135

 

$

129,289

 

$

(17,004

)

$

(46,719

)

$

218,715

 

 

See notes to condensed consolidated financial statements.

 

6



Table of Contents

 

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

JUNE 30, 2010

Unaudited

(Tabular Amounts In Thousands Except Share, Per Share, Option, and Per Option Data)

 

(1)           Basis of Presentation

 

The accompanying condensed consolidated financial statements of Steinway Musical Instruments, Inc. and subsidiaries (the “Company”) for the three and six months ended June 30, 2010 and 2009 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2009, and include all adjustments which are of a normal and recurring nature, necessary for the fair presentation of financial position, results of operations and cash flows for the interim periods. We encourage you to read the condensed consolidated financial statements in conjunction with the risk factors, consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the entire year.

 

Throughout this report “we,” “us,” and “our” refer to Steinway Musical Instruments, Inc. and subsidiaries taken as a whole.

 

(2)           Summary of Significant Accounting Policies

 

Principles of Consolidation - Our condensed consolidated financial statements include the accounts of all direct and indirect subsidiaries, all of which are wholly owned, including the piano (“Steinway”), band (“Conn-Selmer”), and online music (“Arkiv”) divisions. Intercompany balances have been eliminated in consolidation.

 

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Income Taxes - We provide for income taxes using an asset and liability approach. We compute deferred income tax assets and liabilities for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. We establish valuation allowances when necessary to reduce deferred tax assets to the amount that more likely than not will be realized.

 

We provide reserves for potential payments of tax to various tax authorities related to uncertain tax positions and other issues. Reserves related to uncertain tax positions are based on a determination of whether and how much of a tax benefit taken in our tax filings or positions is more likely than not to be realized, assuming that the matter in question will be raised by the tax authorities. Potential interest and penalties associated with such uncertain tax positions are recorded as a component of income tax expense. We believe appropriate provisions for outstanding issues have been made.

 

Income tax-related interest and penalties is reported as a component of income tax expense. We file income tax returns at the U.S. federal, state, and local levels, as well as in several foreign jurisdictions. With few exceptions, our returns are no longer subject to examinations for years before 2006.

 

There were no material changes to the liability for uncertain tax positions in the first six months of 2010. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in changes in our estimates.

 

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Table of Contents

 

Stock-based Compensation - We record compensation cost on a straight-line basis over the award’s requisite service period for all share-based awards granted. We estimate the fair value of our stock option awards (less estimated forfeitures) and employee stock purchase plan rights on the date of grant using the Black-Scholes option valuation model.

 

Earnings per Common Share - We compute earnings per share using the weighted-average number of common shares outstanding during each period. Diluted earnings per common share reflects the dilutive impact of shares subscribed under the Employee Stock Purchase Plan (“Purchase Plan”) and effect of our outstanding options using the treasury stock method, except when such options would be antidilutive.

 

A reconciliation of the weighted-average shares used for the basic and diluted computations is as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Weighted-average shares:

 

 

 

 

 

 

 

 

 

For basic earnings (loss) per share

 

12,019,468

 

8,533,259

 

11,226,649

 

8,533,259

 

Dilutive effect of stock-based compensation plans

 

79,257

 

 

64,372

 

4,360

 

For diluted earnings (loss) per share

 

12,098,725

 

8,533,259

 

11,291,021

 

8,537,619

 

 

We did not include any of the 797,716 outstanding options to purchase shares of common stock in the computation of diluted (loss) earnings per share for the three and six months ended June 30, 2009 because generally their exercise prices were more than the average market price of our common shares, and therefore antidilutive. We did not include 711,580 or 735,756 outstanding options to purchase shares of common stock in the computation of diluted earnings per share for the three and six months ended June 30, 2010, respectively, because they were antidilutive.

 

Accumulated Other Comprehensive Loss - Accumulated other comprehensive loss is comprised of foreign currency translation adjustments and pension and other postretirement benefits. The components of accumulated other comprehensive loss are as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

Accumulated other comprehensive loss:

 

 

 

 

 

Foreign currency translation adjustment

 

$

(1,933

)

$

7,280

 

Pension and other postretirement benefits

 

(15,071

)

(15,131

)

Total accumulated other comprehensive loss

 

$

(17,004

)

$

(7,851

)

 

The components of comprehensive loss are as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,180

 

$

(620

)

$

2,980

 

$

385

 

Foreign currency translation adjustment

 

(5,223

)

4,402

 

(9,213

)

1,114

 

Pension and other postretirement benefits, net

 

60

(1)

 

60

(1)

 

Total comprehensive loss

 

$

(3,983

)

$

3,782

 

$

(6,173

)

$

1,499

 

 


(1) Represents a gross change of $83, net of $23 in related tax impact.

 

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Table of Contents

 

Recent Accounting Pronouncements - In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance which amends the existing fair value measurements and disclosures guidance. These amendments require a greater level of disaggregated information as well as more disclosure around valuation techniques and inputs to fair value measurements. The amendments also provide guidance on employers’ disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. We were required to comply with this new standard as of January 1, 2010. Its adoption did not have a material impact on our consolidated financial statements.

 

In March 2010, the FASB issued new guidance which clarifies the scope exception for embedded credit related derivatives. We will be required to comply with this new standard on July 1, 2010. We do not expect a material impact on our financial statements from the adoption of this guidance.

 

(3)           Inventories

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

Raw materials

 

$

16,170

 

$

18,413

 

Work-in-process

 

35,354

 

42,121

 

Finished goods

 

100,344

 

97,496

 

Total inventory

 

$

151,868

 

$

158,030

 

 

(4)           Goodwill, Trademarks, and Other Intangible Assets

 

Intangible assets other than goodwill and indefinite-lived trademarks are amortized on a straight-line basis over their estimated useful lives. Deferred financing costs are amortized over the repayment periods of the underlying debt. We performed our annual goodwill and intangible asset impairment test as of July 31, 2009. Based on our analysis, it was determined that a portion of the trademarks associated with the online music business of the piano division was impaired. Accordingly, we wrote down the trademarks by $1.0 million in 2009. Our analysis of the other piano and band division trademarks did not indicate an impairment; therefore, no charge was taken against those assets or any other intangible assets attributable to those divisions. No other events or circumstances occurred subsequent to our annual impairment test which would have indicated that these assets may be impaired.

 

The changes in carrying amounts of goodwill and trademarks are as follows:

 

 

 

Piano

 

Band

 

Total

 

Goodwill:

 

 

 

 

 

 

 

Balance, January 1, 2010

 

$

24,063

 

$

 

$

24,063

 

Foreign currency translation impact

 

(2,134

)

 

(2,134

)

Balance, June 30, 2010

 

$

21,929

 

$

 

$

21,929

 

 

 

 

 

 

 

 

 

Trademarks:

 

 

 

 

 

 

 

Balance, January 1, 2010

 

$

9,460

 

$

5,824

 

$

15,284

 

Foreign currency translation impact

 

(670

)

 

(670

)

Balance, June 30, 2010

 

$

8,790

 

$

5,824

 

$

14,614

 

 

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Table of Contents

 

We also carry certain intangible assets that are amortized. Once fully amortized, these assets are removed from both the gross and accumulated amortization balances. These assets consist of the following:

 

 

 

 

June 30,
2010

 

December 31,
2009

 

Gross deferred financing costs

 

$

5,088

 

$

5,333

 

Accumulated amortization

 

(3,262

)

(3,135

)

Deferred financing costs, net

 

$

1,826

 

$

2,198

 

 

 

 

 

 

 

Gross non-compete agreements

 

$

250

 

$

250

 

Accumulated amortization

 

(106

)

(81

)

Non-compete agreements, net

 

$

144

 

$

169

 

 

 

 

 

 

 

Gross customer relationships

 

$

512

 

$

506

 

Accumulated amortization

 

(221

)

(166

)

Customer relationships, net

 

$

291

 

$

340

 

 

 

 

 

 

 

Gross website and developed technology

 

$

2,176

 

$

2,176

 

Accumulated amortization

 

(917

)

(700

)

Website and developed technology, net

 

$

1,259

 

$

1,476

 

 

 

 

 

 

 

Total gross other intangibles

 

$

8,026

 

$

8,265

 

Accumulated amortization

 

(4,506

)

(4,082

)

Other intangibles, net

 

$

3,520

 

$

4,183

 

 

Deferred financing costs were impacted by our purchase of $5.8 million of our Senior Notes in May and June, 2010. These repurchases are described more fully in Note 6. The weighted-average amortization period for deferred financing costs is seven years, and the weighted-average amortization period for all other amortizable intangibles is approximately five years. Total amortization expense, which includes amortization of deferred financing costs, is as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Amortization expense

 

$

305

 

$

332

 

$

611

 

$

667

 

 

The following table shows the total estimated amortization expense for the remainder of 2010 and beyond:

 

Remainder of 2010

 

$

599

 

2011

 

1,138

 

2012

 

1,026

 

2013

 

674

 

2014

 

80

 

Thereafter

 

3

 

Total

 

$

3,520

 

 

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Table of Contents

 

(5)           Other Current Liabilities

 

 

 

June 30,
2010

 

December 31,
2009

 

Accrued payroll and related benefits

 

$

12,443

 

$

9,326

 

Current portion of pension and other postretirement benefit liabilities

 

1,129

 

1,456

 

Accrued warranty expense

 

1,432

 

1,553

 

Accrued interest

 

3,545

 

3,675

 

Deferred income

 

7,124

 

7,210

 

Environmental liabilities

 

2,290

 

2,377

 

Income and other taxes payable

 

1,992

 

3,383

 

Other accrued expenses

 

7,661

 

7,415

 

Total

 

$

37,616

 

$

36,395

 

 

Accrued warranty expense is recorded at the time of sale for instruments that have a warranty period ranging from one to ten years. The accrued expense recorded is generally calculated on a ratio of warranty costs to sales based on our warranty history and is adjusted periodically following an analysis of actual warranty claims. The accrued warranty expense activity for the six months ended June 30, 2010 and 2009, and the year ended December 31, 2009 is as follows:

 

 

 

June 30,
2010

 

June 30,
2009

 

December 31,
2009

 

Beginning balance

 

$

1,553

 

$

1,451

 

$

1,451

 

Additions

 

433

 

432

 

945

 

Claims and reversals

 

(460

)

(494

)

(865

)

Foreign currency translation impact

 

(94

)

21

 

22

 

Ending balance

 

$

1,432

 

$

1,410

 

$

1,553

 

 

(6)           Long-Term Debt

 

Our long-term debt consists of the following:

 

 

 

June 30,
2010

 

December 31,
2009

 

Senior Notes

 

$

152,506

 

$

158,326

 

Unamortized bond discount

 

(530

)

(623

)

Overseas lines of credit

 

1,131

 

537

 

Total

 

153,107

 

158,240

 

Less: current portion

 

1,131

 

537

 

Long-term debt

 

$

151,976

 

$

157,703

 

 

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Scheduled repayments of long-term debt as of June 30, 2010 are as follows:

 

Remainder of 2010

 

$

1,131

 

2011

 

 

2012

 

 

2013

 

 

2014

 

152,506

 

Total

 

$

153,637

 

 

During the second quarter of 2010, we repurchased $5.8 million of our Senior Notes at prices ranging from 95.0% to 98.0% plus interest. As a result, we recorded a net gain on extinguishment of debt of $0.1 million. A summary of the transactions is as follows:

 

Principal repurchased

 

$

5,820

 

Less:

 

 

 

Cash paid

 

(5,633

)

Write-off of deferred financing costs

 

(64

)

Write-off of bond discount

 

(19

)

Net gain on extinguishment of debt

 

$

104

 

 

(7)           Fair Values of Financial Instruments

 

Our financial instruments, which are recorded at fair value, consist primarily of foreign currency contracts and marketable equity securities. We assess the inputs used to measure fair value using the following three-tier hierarchy, which indicates the extent to which inputs used are observable in the market.

 

Level 1                              Valuation is based upon unadjusted quoted prices for identical instruments traded in active markets.

 

Level 2                                Valuation is based upon quoted prices for identical or similar instruments such as interest rates, foreign currency exchange rates, commodity rates and yield curves, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

Level 3                                Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions include management’s own judgments about the assumptions market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. (We do not have any assets or liabilities carried at Level 3 fair value.)

 

We value our foreign currency contracts using internal models with observable inputs, including currency forward and spot prices. Estimated fair value has been determined as the difference between the current forward rate and the contract rate, multiplied by the notional amount of the contract, or upon the estimated fair value of purchased option contracts.

 

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Table of Contents

 

The following table presents information about our assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 and December 31, 2009 and the fair value hierarchy of the valuation techniques we utilized.

 

 

 

June 30,
2010

 

December 31,
2009

 

Financial assets:

 

 

 

 

 

Trading securities(1) - Level 1

 

$

1,584

 

$

1,623

 

Foreign currency contracts(2) - Level 2

 

867

 

82

 

 

 

$

2,451

 

$

1,705

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

Foreign currency contracts(2) - Level 2

 

$

704

 

$

3

 

 


(1)          Our trading securities pertain to the Supplemental Executive Retirement Plan (“SERP”) and are held in a Rabbi Trust. We record a corresponding liability for the same amount in our financial statements, which represents our obligation to SERP participants.

 

(2)          Our foreign currency contracts pertain to obligations or potential obligations to purchase or sell euros, pounds, U.S. dollars, and yen under various forward contracts.

 

We base the estimated fair value of our debt on institutional quotes currently available to us. The historical cost, net carrying value, and estimated fair value are as follows:

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

Net Carrying
Value

 

Estimated
Fair Value

 

Net Carrying
Value

 

Estimated
Fair Value

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Debt

 

$

153,637

 

$

146,774

 

$

158,863

 

$

144,218

 

 

The carrying values of accounts, notes and other receivables, and accounts payable approximate fair value.

 

(8)           Stockholders’ Equity and Stock-based Compensation Arrangements

 

Our common stock is comprised of two classes: Class A and Ordinary. With the exception of disparate voting power, both classes are substantially identical. Each share of Class A common stock entitles the holder to 98 votes. Holders of Ordinary common stock are entitled to one vote per share. Each share of Class A common stock shall automatically convert to Ordinary common stock if, at any time, that share of Class A common stock is not owned by an original Class A holder. In March 2010 Samick Musical Instruments Co., Ltd. (“Samick”) exercised its right to purchase 1,700,000 shares of our ordinary common stock at a price of $16.00 per share, which resulted in a cash payment to us of $27.2 million. As of June 30, 2010 our Chairman and our Chief Executive Officer collectively owned 100% of the Class A common shares, representing approximately 80% of the combined voting power of the Class A common stock and Ordinary common stock.

 

Employee Stock Purchase Plan - We have an employee stock purchase plan under which substantially all employees may purchase Ordinary common stock through payroll deductions at a purchase price equal to 85% of the lower of the fair market values as of the beginning or end of each twelve-month offering period. Stock purchases under the Purchase Plan are limited to 5% of an employee’s annual base earnings. We have reserved 400,000 shares of common stock for issuance under this plan.

 

Stock Plans - The 2006 Stock Plan provides for the granting of 1,000,000 stock options (including incentive stock options and non-qualified stock options), stock appreciation rights and other stock awards to certain key employees, consultants and advisors. Our stock options generally have five-year vesting terms and ten-year option terms.

 

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Table of Contents

 

Our 1996 Stock Plan has expired but still has vested and unvested options outstanding. We reached our registered share limitation in early 2007, and had previously reserved 721,750 treasury stock shares to issue under this plan. We have since issued 122,674 shares of treasury stock to cover options exercised, with 338,276 remaining options outstanding. Since in most instances the average cost of the treasury stock exceeded the price of the options exercised, the difference between the proceeds received and the average cost of the treasury stock issued resulted in a reduction of retained earnings. This reduction was $0.1 million for the three and six months ended June 30, 2010. There were no stock option exercises during the three and six months ended June 30, 2009.

 

The compensation cost and the income tax benefit recognized for these plans is as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Compensation cost included in basic and diluted income per share

 

$

0.03

 

$

0.03

 

$

0.05

 

$

0.06

 

Stock-based compensation expense

 

375

 

293

 

741

 

562

 

Income tax benefit

 

68

 

43

 

135

 

85

 

 

We measured the fair value of options on their grant date, including the valuation of the option feature implicit in our Purchase Plan, using the Black-Scholes option-pricing model. The risk-free interest rate is based on the weighted-average of U.S. Treasury rates over the expected life of the stock option or the contractual life of the option feature in the Purchase Plan. The expected life of a stock option is based on historical data of similar option holders. We have segregated our employees into two groups based on historical exercise and termination behavior. The expected life of the option feature in the Purchase Plan is the same as its contractual life. Expected volatility is based on historical volatility of our stock over the expected life of the option, as our options are not readily tradable.

 

There were no options granted during the three or six months ended June 30, 2010 or 2009. The following table sets forth information regarding the Stock Plans:

 

 

 

Number of
Options

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contract
Life
(in years)

 

Aggregate
Intrinsic
Value
(in whole $)

 

Outstanding, January 1, 2010

 

1,129,176

 

$

20.61

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(23,700

)

18.84

 

 

 

 

 

Forfeited

 

(15,320

)

24.58

 

 

 

 

 

Outstanding, June 30, 2010

 

1,090,156

 

$

20.59

 

6.7

 

$

2,371,645

 

 

 

 

 

 

 

 

 

 

 

Exercisable, June 30, 2010

 

508,576

 

$

23.67

 

4.5

 

$

6,370

 

 

There were no options exercised during the three months ended June 30, 2010. The total intrinsic value of the options exercised during the six months ended June 30, 2010 was nominal. There were no options exercised during the three and six months ended June 30, 2009. As of June 30, 2010, there was $3.4 million of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Plan. This compensation cost is expected to be recognized over a period of 3.4 years. Cash received from option exercises under the Stock Plans for the period ended June 30, 2010 was $0.4 million.

 

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Table of Contents

 

The following tables set forth information regarding the Purchase Plan:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Risk-free interest rate

 

0.5%

 

2.2%

 

0.5%

 

2.2%

 

Weighted-average expected life of option feature (in years)

 

1.0

 

1.0

 

1.0

 

1.0

 

Expected volatility of underlying stock

 

27.9%

 

25.3%

 

27.9%

 

25.3%

 

Expected dividends

 

n/a

 

n/a

 

n/a

 

n/a

 

Weighted-average fair value of option feature

 

$2.79

 

$6.71

 

$2.79

 

$6.71

 

 

 

 

Number of
Options

 

Weighted-
Average
Exercise
Price

 

Remaining
Contract
Life
(in years)

 

Aggregate
Intrinsic
Value
(in whole $)

 

Outstanding, January 1, 2010

 

24,382

 

$

9.65

 

 

 

 

 

Granted

 

27,307

 

9.65

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Forfeited

 

(957

)

9.65

 

 

 

 

 

Outstanding, June 30, 2010

 

50,732

 

$

9.65

 

0.1

 

$

419,046

 

 

(9)                                 Other Expense (Income), Net

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

West 57th Street building income

 

$

(961

)

$

(1,553

)

$

(3,393

)

$

(3,058

)

West 57th Street building expense

 

1,689

 

971

 

3,461

 

2,186

 

Foreign exchange (gain) loss, net

 

(217

)

635

 

(713

)

349

 

Miscellaneous, net

 

147

 

(306

)

(164

)

(288

)

Other expense (income), net

 

$

658

 

$

(253

)

$

(809

)

$

(811

)

 

Our building on West 57th Street in New York City is managed by an outside company. West 57th Street building income includes all rent and other income attributable to the property; and West 57th Street building expense includes the land lease, real estate taxes, depreciation, and other building costs. Since we utilize a portion of the leasable space for our own retail store, we have allocated a ratable portion of the building expenses to sales and marketing expenses.

 

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Table of Contents

 

(10)         Commitments and Contingent Liabilities

 

We are involved in certain legal proceedings regarding environmental matters, which are described below. Further, in the ordinary course of business, we are party to various legal actions that we believe are routine in nature and incidental to the operation of our business. While the outcome of such actions cannot be predicted with certainty, we believe that, based on our experience in dealing with these matters, their ultimate resolution will not have a material adverse impact on our business, financial condition, results of operations or prospects.

 

Certain environmental laws, such as the Comprehensive Environmental Response, Compensation, and Liability Act, as amended (“CERCLA”), impose strict, retroactive, joint and several liability upon persons responsible for releases of hazardous substances, which liability is broadly construed. Under CERCLA and other laws, we may have liability for investigation and cleanup costs and other damages relating to our current or former properties, or third-party sites to which we sent wastes for disposal. Our potential liability at any of these sites is affected by many factors including, but not limited to, the method of remediation, our portion of the hazardous substances at the site relative to that of other parties, the number of responsible parties, the financial capabilities of other parties, and contractual rights and obligations.

 

We are continuing an existing environmental remediation plan at a facility we acquired in 2000 and subsequently sold. We estimate our costs, which approximate $0.7 million, over an 11-year period. We have accrued approximately $0.5 million for the estimated remaining cost of this remediation program, which represents the present value total cost using a discount rate of 4.54%. A summary of expected payments associated with this project is as follows:

 

 

 

Environmental
Payments

 

Remainder of 2010

 

$

44

 

2011

 

61

 

2012

 

61

 

2013

 

61

 

2014

 

61

 

Thereafter

 

362

 

Total

 

$

650

 

 

In 2004, we acquired two manufacturing facilities from G. Leblanc Corporation, now Grenadilla, Inc. (“Grenadilla”), for which environmental remediation plans had already been established. In connection with the acquisition, we assumed the existing accrued liability of approximately $0.8 million for the cost of these remediation activities. Based on a review of past and ongoing investigatory and remedial work by our environmental consultants, and discussions with state regulatory officials, as well as periodic sampling, we estimate the remaining costs of such remedial plans to be $1.8 million. Pursuant to the purchase and sale agreement, we sought indemnification from Grenadilla for anticipated costs above the original estimate.We filed a claim against the escrow and recorded a corresponding receivable for this amount in prepaid expenses and other current assets in our consolidated balance sheet. Based on the current estimated costs of remediation, this receivable totaled $2.1 million as of June 30, 2010. We have reached an agreement with Grenadilla whereby related environmental costs are paid directly out of the escrow. Currently, the escrow balance exceeds our receivable balance. Should the escrow be reduced to zero, we would seek further indemnification from Grenadilla for these additional costs. However, we cannot be assured that we will be able to recover such costs.

 

Based on our past experience and currently available information, the matters described above and our other liabilities and compliance costs arising under environmental laws are not expected to have a material impact on our capital expenditures, earnings or competitive position in an individual year. However, some risk of environmental liability is inherent in the nature of our current and former businesses and we may, in the future, incur material costs to meet current or more stringent compliance, cleanup, or other obligations pursuant to environmental laws.

 

In May 2008 we acquired 100% of the membership interest in ArkivMusic, LLC, an online retailer of classical music. Under the purchase agreement, we are obligated to pay an amount equal to 5% of the net operating profits of Arkiv, if any, in 2010, the sum of which is not to exceed $2.5 million. The final purchase price is dependent upon a calculation derived from the 2010 net operating profits which, when finalized, is expected to result in an additional payment between $0.0 million and $2.0 million. To date we have not recorded any liability or additional purchase price associated with this acquisition. However, we may have to do so in the latter part of 2010.

 

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Table of Contents

 

(11)         Retirement Plans

 

We have defined benefit pension plans covering the majority of our employees, including certain employees in Germany and the U.K. The components of net periodic pension cost for these plans are as follows:

 

 

 

Domestic Plan

 

Foreign Plans

 

 

 

Three Months Ended June 30,

 

Three Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Service cost

 

$

82

 

$

89

 

$

148

 

$

141

 

Interest cost

 

884

 

858

 

408

 

432

 

Expected return on plan assets

 

(1,047

)

(871

)

(72

)

(73

)

Amortization of prior service cost (credit)

 

28

 

52

 

(13

)

 

Amortization of net loss

 

486

 

647

 

46

 

2

 

Net periodic pension cost

 

$

433

 

$

775

 

$

517

 

$

502

 

 

 

 

Domestic Plan

 

Foreign Plans

 

 

 

Six Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Service cost

 

$

175

 

$

193

 

$

319

 

$

274

 

Interest cost

 

1,728

 

1,722

 

861

 

838

 

Expected return on plan assets

 

(2,097

)

(1,746

)

(167

)

(140

)

Amortization of prior service cost (credit)

 

56

 

103

 

(13

)

 

Amortization of net loss

 

978

 

1,255

 

80

 

4

 

Net periodic pension cost

 

$

840

 

$

1,527

 

$

1,080

 

$

976

 

 

On April 1, 2010, we amended our U.K. pension plan prospectively to both limit active participants’ annual increases in pensionable salary and reduce the rate at which participants accrue final benefits. We remeasured the plan’s benefit obligation, plan assets and net periodic pension cost as a result of the plan amendment. Assumptions utilized are as follows:

 

 

 

Benefit Obligation

 

Net Periodic Pension Cost

 

 

 

April 1,

 

January 1,

 

April 1,

 

January 1,

 

Weighted-

 

 

 

2010

 

2010

 

2010

 

2010

 

Average

 

Discount rate

 

5.50%

 

5.80%

 

5.50%

 

5.80%

 

5.67%

 

Expected return on assets

 

n/a

 

n/a

 

5.30%

 

5.30%

 

5.30%

 

Rate of compensation increase

 

3.80%

 

4.80%

 

3.80%

 

4.80%

 

4.37%

 

 

The decrease in our long-term pension benefit obligation was more than offset by an increase in our actuarial loss due to the change in valuation assumptions when the plan was remeasured. The plan amendment resulted in a gross decrease in our pension benefit obligation of $0.6 million through recognition of a prior service credit, which will be amortized over a period of 12 years. On a net basis, our long term pension benefit obligation increased by less than $0.1 million and our accumulated other comprehensive loss decreased by $0.1 million, net of tax.

 

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Table of Contents

 

We provide postretirement health care and life insurance benefits to a limited number of certain eligible hourly retirees and their dependents. As a result of terminating one of our collective bargaining agreements in 2009, we have a limited number of participants receiving health care benefits under this plan. Once these participants reach age sixty-five and are eligible for Medicare, no postretirement health care benefits will be provided under this plan. We will continue to provide life insurance benefits for eligible retirees. During the quarter ended June 30, 2010, we made a settlement payment of $0.1 million associated with this plan. This payment had no material impact on the plan. The components of net periodic postretirement benefit cost for these benefits are as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Service cost

 

$

4

 

$

2

 

$

5

 

$

3

 

Interest cost

 

8

 

19

 

21

 

36

 

Amortization of prior service credit

 

(28

)

(13

)

(57

)

(26

)

Settlement

 

6

 

 

6

 

 

Net periodic postretirement benefit cost (benefit)

 

$

(10

)

$

8

 

$

(25

)

$

13

 

 

Based on federal laws and regulations, we are not required to make a contribution to our domestic pension plan in 2010. We made a payment of less than $0.1 million to this plan during the period and are currently evaluating what additional amount, if any, we will contribute to this plan in 2010. Our anticipated contributions to the pension plan of our U.K. subsidiary approximate $0.8 million for the current year. As of June 30, 2010, we have made contributions of $0.4 million to this plan. The pension plans of our German entities do not hold any assets and use operating cash to pay participant benefits as they become due. Expected 2010 benefit payments under these plans are $1.1 million, of which $0.6 million was paid through June 2010.

 

(12)         Segment Information

 

We have identified two reportable segments: the piano segment and the band & orchestral instrument segment. We consider these two segments reportable as they are managed separately and the operating results of each segment are separately reviewed and evaluated by our senior management on a regular basis. We have included the results of our online music division within the “U.S. Piano Segment” as we believe its results are not material and its products and customer base are most correlated with piano operations. Management and the chief operating decision maker use income from operations as a meaningful measurement of profit or loss for the segments. Income from operations for the reportable segments includes certain corporate costs allocated to the segments based primarily on revenue, as well as intercompany profit. Amounts reported as “Other & Elim” contain corporate costs that were not allocated to the reportable segments, and the remaining intercompany profit elimination.

 

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Table of Contents

 

The following tables present information about our operating segments for the three and six months ended June 30, 2010 and 2009:

 

Three Months Ended 2010

 

Piano Segment

 

Band Segment

 

Other &

 

Consol

 

 

 

U.S.

 

Germany

 

Other

 

Total

 

U.S.

 

Europe

 

Total

 

Elim

 

Total

 

Net sales to external customers

 

$

21,366

 

$

12,943

 

$

10,813

 

$

45,122

 

$

32,144

 

$

982

 

$

33,126

 

$

 

$

78,248

 

Income (loss) from operations

 

223

 

2,365

 

999

 

3,587

 

2,031

 

67

 

2,098

 

(544

)

5,141

 

 

Three Months Ended 2009

 

Piano Segment

 

Band Segment

 

Other &

 

Consol

 

 

 

U.S.

 

Germany

 

Other

 

Total

 

U.S.

 

Europe

 

Total

 

Elim

 

Total

 

Net sales to external customers

 

$

17,779

 

$

13,076

 

$

11,545

 

$

42,400

 

$

28,755

 

$

958

 

$

29,713

 

$

 

$

72,113

 

Income (loss) from operations

 

(1,005

)

1,791

 

1,085

 

1,871

 

556

 

85

 

641

 

(1,005

)

1,507